Unit 2 · Level 4 · Options I
Delta & theta: the first greeks
The 'greeks' measure how a premium responds to forces. DELTA: how much the option moves per $1 of the underlying (≈ its directional exposure). THETA: how much it bleeds per day of time. Two more exist (gamma, vega), but delta and theta run 90% of practical decisions.
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What you get asked
A call with delta 0.60. The stock rises $2. The premium moves roughly…
Delta is the option's gearing to the underlying. 0.60 delta ≈ owning 60 shares' worth of exposure per contract (100 shares).
Match the delta to the option's personality
Delta also doubles as a rough market-implied probability of expiring ITM: a 0.10-delta option is priced like a ~10% shot.
Theta on your option is −$0.08/day and expiry is 10 days out. You need the stock to move soon because…
Sideways = slow loss even if you're 'not wrong yet'. Option buyers are betting on direction WITHIN a deadline, not just direction. 'Right but slow' loses. This changes which setups qualify.
Option SELLERS collect ___ decay; they're paid for renting possibility to buyers.
The other side of every melting ice cube is someone selling ice. Selling options earns steady theta with capped gain and larger tail risk. It's a business, not a lottery, and it demands its own risk discipline.
Your trading plan says 'expect a breakout in 1–3 days'. Which option matches the thesis best?
Meaningful delta, survivable theta. Match the instrument to the thesis: enough delta to profit from the move, enough time that theta doesn't eat you while waiting. Instrument selection IS part of the edge. 🐜
The rest of this unit
Calls, puts, premium anatomy, delta & theta: risk as a design input.